In every business acquisition, the warranties and indemnities included in the purchase agreement are extensively negotiated. Very briefly, the warranties and indemnities govern the seller's liability after the acquisition is effected.
If the buyer believes he has overpaid, he will try to claim back part of the (in his eyes) overpriced purchase price by invoking a warranty or indemnity. For anyone dealing with acquisitions, the terms "warranty" and "indemnity" will seem familiar. However, the distinction and meaning of those terms is far from clear to everyone.
Legal terms
Both the term "warranty" and the term "indemnity" are not well-defined legal concepts. What is decisive is what the parties themselves write down in their purchase agreement and what interpretation they themselves give to these terms.
In practice, warranties are statements by the seller about the characteristics of the company being sold (the "target company"). These statements color the expectation that the buyer may have of the target company. Does a warranty turn out to be incorrect? Then the target company does not meet the characteristics that the buyer was entitled to expect and he can sue the seller under the warranty. In that case, it is up to the buyer to prove that a warranty has been breached and what damages he has suffered as a result.
In an indemnity, the parties agree that the seller will bear a certain risk if that risk occurs after the acquisition is effected. Thus, an indemnification offers a buyer more certainty than a guarantee: if the specific risk occurs, the seller will reimburse the relevant costs to the buyer or the target company on a one-to-one basis. In principle, there is no need to discuss the amount of damages and the extent to which a warranty has or has not been breached.
Limitations of liability
It is assumed that a buyer cannot rely on a warranty if he already knew that the warranty was incorrect. An example: if you buy a car that is guaranteed to drive well, but you know that the tire is flat, you cannot complain afterwards that it does not drive well because the tire is flat. If you know the tire is flat, you have to make specific agreements about it. Another distinction is that parties generally agree different limitations of liability. Less far-reaching limitations of liability are usually agreed upon for known risks (indemnities) than for unknown risks (warranties).
In practice, indemnities are therefore used to cover risks that have already been identified before the purchase agreement is concluded, for example, a specific liability claim that is up in the air. Warranties refer to general properties that the buyer wants the target company to have. Therefore, the list of general warranties is many times longer than the list of specific indemnities.
